Price rise: Worst may be over

The worst could be over for the spiralling food prices world over. Reason: arrival of a bumper new crop in most grain exporting regions.

In 2008, the world cereal production is likely to increase by 2.6 per cent to a record 2,164 million tonnes. Wheat output may reach a new record and rice production looks all set to rise marginally at a critical time when global cereal reserves stand depleted to a 25-year low.

“Should the expected growth in 2008 production materialise, the current tight global cereal supply situation could ease in the new 2008-9 season,” says the latest crop prospects and food situation report of the Food and Agricultural Organisation (FAO).

The bulk of the production increase is projected to be in wheat due to expansion of sowing in major grain producing countries. The wheat output is likely to reach a new record of 647 million tonnes — 6.8 per cent up from 2007. Following incentives in several Asian countries, rice production is also foreseen to increase marginally by about 1.8 per cent.

The good news is that the climatic conditions so far have been favourable, but the final outcome would depend on how the weather behaves in the rest of the year.

The FAO report is upbeat on production with a word of caution on prices. The nearby wheat futures (May ’08) are already down by US$ 50 per tonne since late February, but still more than 130 per cent over the corresponding period last year, the forecast notes. It blames the current high prices on supply tightness, export restrictions, strong demand for imports and a weak US dollar. This could mean that a bumper new crop may arrest the northward march of prices but may not bring about a crash in the near future.

Compared to the end of March last year, the prices of staple cereals like wheat and rice in 2008 have been twice as high and maize about a third higher, raising severe concerns in Low Income Food Deficit (LIFD) countries in Asia, Africa and Latin America. Many countries, including traditional exporters of food grain, have imposed restrictions on exports leading to further panic and price rise.

The LIFDC’s own cereal production is likely to increase only marginally, but early prospects in larger countries like India and China point to a slight drop in production. Most of these countries would again end up importing food grain. “In 2007-08 the cereal import bill of the LIFDCs as a group is forecast to increase considerably for the second consecutive year,” the FAO forecast notes. In 2006-07 food prices rose 37 per cent, followed by a 56 per cent rise in 2007-08.

The world cereal stocks are expected to fall to 405 million tonnes, down five per cent from already reduced levels. According to the FAO estimates, the global stocks have fallen even in major exporting countries. As a result, Australia, Canada and the EU — three of the five major exporters — have less exportable surplus this year. The world trade in wheat is also forecast to decline.